The following questions about referral fees, incentives and promotions were recently asked of the Legal Hotline.

Relocation Company referral fees

After the seller entered into a listing contract with the listing broker, the seller said he is working with a relocation company. The relocation company is now requiring that the broker give them 25 percent of the listing fee. Is this legal? 

Relocation company referrals may be structured in various ways. The relocation company may request a referral fee that goes directly to the seller, or may request a payment made directly to the relocation company.

Payment to a seller may be legally structured as a seller incentive, but it is the broker’s decision whether to agree to this arrangement. If the broker agrees, the listing contract may be amended to reduce the commission or a seller incentive could be documented and paid at closing.

If payment is to be made to the relocation company, it must be determined if they are eligible to receive a referral fee. Wis. Stat. § 452.19 limits the payment of referral fees, finders’ fees and commission splits to Wisconsin real estate licensees and persons regularly and lawfully engaged in real estate brokerage in another state or country. Before paying a referral fee, it is prudent to verify that the relocation company is properly credentialed. More information regarding relocation company transactions may be reviewed in Legal Update 98.04, “Relocation Company Sales,” at www.wra.org/LU9804.

Broker-to-broker referrals

A local broker entered into a written referral agreement with a broker from another part of Wisconsin. The referred sellers listed their property with the local broker. After two months, the sellers decided not to sell and the listing contract was cancelled. The sellers later decided to re-list the property with the local broker, but asked for a reduced listing commission. The sellers said the local listing broker would not have to pay the referral fee to the other agent. The sellers have accepted an offer that will close in a couple of weeks. The referring broker is demanding the referral fee even though she knows that there was a reduced commission and that the sellers said the listing broker would not have to pay the referring broker. Is the listing broker legally obligated to pay the referral fee? 

Whether a referral fee is due and the amount of any referral fee are contract interpretation issues that will depend on the terms of the referral agreement. The contract terms should be reviewed to see if the listing broker may owe commission regardless of the fact that the transaction resulted from a second listing, and if there were time limits or other parameters incorporated into the agreement. The amount of any referral fee might be computed based on the amount of the original listing commission or the reduced commission.

If this matter cannot be resolved informally between the brokers, the listing broker may use inter-board arbitration and a hearing panel will decide the matter. Note that because the agreement was broker to broker, the seller does not have the authority to terminate the agreement or vary the amount of the referral fee or other terms of the agreement.

To assist in drafting future referral agreements, the brokers may review Legal Update 02.01, “Getting Paid Outside the MLS,” at www.wra.org/L0201. The Update reviews non-MLS offers of compensation and referral agreements in detail. Also see the previous article “Get it in Writing”.

Party incentives

Is there any problem with advertising a $200 commission rebate at closing to sellers who list their properties during a certain time period? What about money or a gift to a buyer who works with the broker to buy a property? 

Incentives may be offered to sellers or buyers to induce them to sell or purchase real estate. Seller or buyer incentives can be offered in any amount as cash or a discounted fee, or as an item of personal property such as a home warranty plan, a savings bond, a gift certificate, an appliance or some other item. Such incentives must be clearly documented before closing. The parties must have a clear and thorough understanding of the incentive’s terms and conditions. This advance documentation is necessary to establish that the party incentive is not a fee-splitting arrangement with a non-licensee, which would be illegal under Wisconsin law.

Standard of Practice (SOP) 12-3, which interprets Article 12 of the Code of Ethics, provides that: “REALTORS® shall be careful at all times to present a true picture in their advertising and representations to the public. … ” SOP 12-3 also states, “The offering of premiums, prizes, merchandise discounts or other inducements to list, sell, purchase, or lease is not, in itself, unethical even if receipt of the benefit is contingent on listing, selling, purchasing, or leasing through the REALTOR^® making the offer. However, REALTORS^® must exercise care and candor in any such advertising or other public or private representations so that any party interested in receiving or otherwise benefiting from the offer will have clear, thorough, advance understanding of all the terms and conditions of the offer. ”

This standard assumes that the omission of even one detail will cause the advertisement to present less than a true picture. This may be disputable should someone bring an ethics complaint concerning an ad for party incentives that does not contain every detail – the issue will be whether there is a true picture of the offered incentive in the ad. An ad that states, “see broker for details,” however, is like a red flag waving in the face of a competitor who lives by the SOPs – it may be seen as an admission that less than a true picture has been disclosed in the ad.

Drawings

A broker would like to do a general mailing to past clients and customers to offer them an entry into a drawing for a gift certificate for every name of a seller or buyer prospect that is submitted to the broker. Is this legal? 

The first consideration is Wis. Stat.§ 452.19, which limits the payment of referral fees, finders fees and commission splits to persons licensed or registered in Wisconsin to practice real estate, or persons regularly and lawfully engaged in real estate brokerage in another state or country. The law prevents giving past clients and customers an entry into a gift certificate drawing because Wisconsin licensees cannot compensate consumers (who do not hold real estate licenses) for referrals.

The second consideration is whether such a drawing is an illegal lottery under Wis. Stat. §§ 945.04(5) and 945.02. A contest is generally categorized as a lottery if one must give consideration to enter, and the award is determined by chance. Consideration is anything that would be a financial or commercial advantage to the promoter, with some exceptions (sending in a coupon or entering all visitors to an open house regardless of qualifications). In this proposed promotion, entering past customers or clients in a drawing based on referrals is arguably an illegal lottery. The fact that the customers are providing names of prospects may be consideration to the broker because it provides a financial or commercial benefit to the broker, and the drawing is by chance.